Russia Economics - Tighter Monetary Policy To Help Disinflation in 2022

Inflation rose to 8.4% y-o-y in November, the highest level since early 2016. The key drivers of this were stronger domestic demand, which has been driven by a surge in retail lending, and high global commodity prices. However, the CBR's tighter monetary policy will help to temper the expansion of lending and cool demand. It will also buoy the ruble and help increase the savings ratio, both of which will contribute to disinflation. At the same time, food inflation, which is being seen across the globe, will remain the major risk for Russia. Russian consumer demand is recovering rapidly after the lockdown-induced decrease in 2Q20. What is important is that the pandemic shifted demand toward non-food consumption. The chart below shows that in real terms non-food retail sales have already significantly exceeded the pre-pandemic level. Food retail sales in real terms demonstrated the relative sustainability since 2020. The consumption of services has been returning to pre-pandemic level very moderately but is close to reaching this level. The contribution of demand expansion to inflation is significant, as we pointed out in our note, "Why the CBR Has To Be Hawkish." Strong growth in lending has been an important factor driving retail demand, particularly in the non-food segment. Retail loans (excluding mortgages) were up by 22% y-o-y in October and by 29% since the beginning of 2020. Auto loans (up by 22% y-o-y in September) showed particularly strong growth, which unsurprisingly fueled demand for cars.The fast growth in non-food consumption has been a global trend. Producers and transportation systems were caught off guard by the surge in demand, which ruptured supply chains. Vivid examples of this include the shipping container crisis, issues with the transport of goods via ports and highways and the chip shortage in the automobile industry. These factors, among others, have driven inflation both globally and in Russia.